Debt Market in India: Key Issues

And Policy Recommendations

What is a debt market?
• A part of the capital market.
• A debt market is also known as a ‘fixed income market as debt
instruments pay fixed returns.

Do you know the impact of the debt market on the economy?

• Opportunity for investors to diversify their investment portfolio.

• Higher liquidity and control over credit.
• Better corporate governance.
• Improved transparency because of stringent disclosure norms and
auditing requirements.
• Less risk compared to the equity markets, encouraging low-risk
investments. This leads to inflow of funds in the economy.
• Increased funds for implementation of government development plans.
The government can raise funds at lower costs by issuing government
securities.
• Implementation of a monetary policy.
The major reforms that took place in the 1990’s
• Introduction of the auction system for sale of dated government securities
in June 1992.

• The RBI moved to computerize the SGL and implement a form of a

‘delivery versus payment’ (DVP) system.

• Innovative products in form of Zero Coupon Bonds and Capital Indexed

Bonds (Ex. Inflation Linked) were issued.

• The RBI setup “trade for trade” regime. All forms of netting were
prohibited.

• Wholesale Debt Market (WDM) segment was set up at NSE.

• Interest Income in G-Secs was exempted from the purview of TD.

• FIIs with 100% Debt Schemes were allowed to invest in GOI Securities and
Indian Debt Market Structure
 Platform’s For Debt Market

• Issuer’s • Trading Platform

Primary Debt Market Secondary Debt Market
• Instruments • Clearing and Settlement
Mechanism
• Investors
• Instrument’s
• Rating agencies
• Investor’s
 Regulation’s For Debt Market
• Public Debt Act, 1944

• Securities and Exchange Board of India (SEBI)

• Local Authorities Loan Act, 1914

• Companies Act, 1956

• Securities Contracts (Regulation) Act, 1956

• Depositories Act, 1996

• Fixed-Income and Money Market Dealers’ Association

Classification Of Debt Instruments
Risk Associated with Bonds

• Interest Rate Risks

• Yield Curve Risks
• Event Risks
• Volatility Risks
• Liquidity Risks
Indian’s Principal Investors
• Commercial Banks

Source: Goldman Sachs

Indian’s Principal Investors (Cont..)
• The Insurance Sector.

Source: Goldman Sachs

Indian’s Principal Investors (Cont..)

• Mutual Funds.
• Pension Schemes and Provident Funds.
• Foreign Institutional Investors.
Issues of Concern
• a) Poor Quality Paper.
• b) Inadequate Liquidity.
• c) Investor Base.
• d) Regulatory Arbitrage (additional costs on
listed companies).
• e) Debt versus Equity: Cost and Risks.
 NEXT STEPS-where do we go from here?

• Transparency

• Market unification and communication

• Regulatory autonomy and effectiveness

• Trustworthy and transparent benchmarks

• Competing and autonomous credit rating agencies

NEXT STEPS- where do we go from here?
Contd…
• Liquidity

• Natural investor base

• Macroeconomic stability

• Legal system

• Efficient equity markets to compete with the dept markets

• Developing a high yield market

The Current State of Play of Debt Market
• What are the negatives in the debt market? :

1) Fiscal Deficit numbers on much higher side

than budgeted.
2) Additional supply of Rs.46000 crores in dated
securities through MSS Bonds.
3) Bonds Price Slipped i.e 10 year benchmark
touched to 6.5 % as compared to 5.85%.
What are the positives in the debt market? :

• Inflation down to 3.92%.

• Oil below $40 / bbl.
• December IIP number at -2.00% v/s
expectation of -0.40%.
• Lower credit off take.
• Room for further rate cuts.
Thank You.